WHEN we think of tax havens, we tend to think of far-off places – countries in South America perhaps or islands in the Caribbean; beautiful places with ugly secrets where millionaires or criminals or both can use murky financial arrangements to avoid paying their share of tax. But the reality is that tax havens in the sun are only one part of the problem which is much closer to home than you might think – indeed, the UK itself is a haven for tax avoidance and Scotland has become home to a particularly unpleasant form of it.

Investigations by The Herald have already uncovered the extent of the problem. In recent years, thousands of limited partnerships have been created in Scotland which foreign firms use to avoid tax. The partnerships are usually sold off the shelf and are registered in private homes or small offices across the country. They do not conduct any actual business here in the UK, but for tax purposes they are British companies which means they can avoid tax in their home nation. Indeed, the partnerships are specifically advertised abroad as zero-tax Scottish offshore companies.

The technicalities of Scots Law also make these limited partnerships particularly attractive for criminals. Unlike similar firms in England and Wales, Scottish limited partnerships have their own legal personality which means they can enter into contracts, own assets and, crucially, open bank accounts. It makes it likely that Scottish limited partnerships are being used for money laundering, corruption and embezzlement overseas.

The precise business arrangements of the latest case uncovered by The Herald, Fuerteventura Inter, are not known, but it has been named by Ukrainian authorities investigating arms exports from the former Soviet Union to the Middle East. The accusation is that Fuerteventura Inter was used as a cover to skim nearly $2m from an export of munitions which officials allegedly pocketed. And where is Fuerteventura Inter registered? In an unassuming little office in the village of Douglas in South Lanarkshire.

The moral case for ending these arrangements is strong. It is relatively easy to make the case against British companies using tax havens abroad because it means the UK and Scottish governments are denied resources they could use to pay for public services in this country, but foreign companies using Britain to avoid tax abroad is just as contemptible. Last year, it emerged that $1bn had been funnelled out of banks in Moldova and it was done using Scottish limited partnerships. In other words, Europe’s poorest country was plunged into a financial crisis because the culprits could use arcane financial arrangements in one of the richest. The UK has a moral responsibility to prevent such a situation happening again.

The reason it has happened in the first place is that a UK address brings a certain kudos and reputation for a foreign firm but how long will the UK’s and Scotland’s reputation last if nothing is done about limited partnerships? There is no suggestion that all limited partnerships are corrupt – they can sometimes be used by landowners to lease farm land for example – but British politicians cannot condemn tax havens abroad while doing nothing about the tax avoidance happening in limited partnerships at home. If it is serious about tax avoidance, the UK Government should order a review of such partnerships without delay and aim to close a loophole that reflects badly on Scotland and could do serious damage to our international reputation.